UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
 
FORM 10-Q
 
x
QUARTERLY REPORT  PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended   March 31, 2013
 
or
 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transaction period from _____________ to _____________
 
Commission file number 333-62216
 
HEALTH DISCOVERY CORPORATION
(Exact name of registrant as specified in its charter)
 
Georgia
(State or other jurisdiction of incorporation or organization)
74-3002154
(IRS Employer Identification No.)
 
620 County Road
Hanson, Massachusetts 02341
 
 
(Address of principal executive offices)
 
 
678-336-5300
  (Registrant’s telephone number, including area code)  
 
2 East Bryan Street
Suite 1500
Savannah, Georgia  31401
 
(Former name, former address and former fiscal year,
if changed since the last report)
 
 
Indicate by check mark whether the registrant:  (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for at least the past 90 days.  Yes x No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x   No o
 
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (check one):
 
  Large Accelerated Filer  o Non-Accelerated Filer            o    
     
(do not check if a smaller reporting company)
 
  Accelerated Filer o Smaller Reporting Company   x    
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No   x

 
 
 
 
APPLICABLE ONLY TO CORPORATE ISSUERS
 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
 
Class:
 
Outstanding as of May 15, 2013
 
       
Common Stock, no par value
    233,773,144  
         
Series A Preferred Stock
    0  
         
Series B Preferred Stock
    17,340,175  

 
ii
 
 
TABLE OF CONTENTS
         
 
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16
         
  Item 1A.  
16
         
   
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16
         
   
16
 
 
     
   
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iii
 
 
 
Item 1. Financial Statements
              
HEALTH DISCOVERY CORPORATION
 
(unaudited)
   
March 31,
   
December 31,
 
   
2013
   
2012
 
             
Assets            
             
Current Assets
           
     Cash
  $ 85,195     $ 171,424  
     Accounts Receivable
    198       90  
     Investment in Available For Sale Securities (Note G)
    1,864,785       1,716,160  
                 
          Total Current Assets
    1,950,178       1,887,674  
                 
Equipment, Less Accumulated Depreciation of $49,372 and $47,219
    9,176       11,329  
                 
Other Assets
               
     Patents, Less Accumulated Amortization of $2,322,250 and $2,256,571
    1,663,544       1,729,224  
                 
          Total Assets
  $ 3,622,898     $ 3,628,227  
                 
  Liabilities and Stockholders’ Equity                
                 
Current Liabilities
               
     Accounts Payable - Trade
  $ 98,308     $ 139,790  
     Accrued Liabilities
    5,000       55,500  
     Deferred Revenue
    1,024,988       1,024,988  
                 
           Total Current Liabilities
    1,128,296       1,220,278  
                 
Long Term Liabilities
               
     Deferred Revenue
    960,369       1,216,616  
     Dividends Payable
    489,751       455,546  
                 
           Total Liabilities
    2,578,416       2,892,440  
                 
Stockholders’ Equity
               
     Series B Preferred Stock, Convertible,
               
       20,625,000 Shares Authorized, 17,340,175 Issued and Outstanding
    1,490,015       1,490,015  
     Common Stock, No Par Value, 300,000,000 Shares Authorized
               
       233,773,144 Shares Issued and Outstanding March 31, 2013
               
       233,773,144 Shares Issued and Outstanding December 31, 2012
    25,257,309       25,263,426  
     Accumulated Deficit
    (25,702,842 )     (26,017,654 )
                 
     Total Stockholders’ Equity
    1,044,482       735,787  
                 
     Total Liabilities and Stockholders’ Equity
  $ 3,622,898     $ 3,628,227  
 
See accompanying notes to financial statements.
 
 
2
 
 
HEALTH DISCOVERY CORPORATION
 
(unaudited)
 
For the Three Months Ended March 31, 2013 and 2012
 
   
2013
   
2012
 
Revenues:
           
     Licensing & Development
  $ 284,139     $ 285,629  
                 
Operating Expenses:
               
     Amortization
    65,680       65,680  
     Professional and Consulting Fees
    279,083       293,758  
     Legal Fees
    39,155       31,173  
     Research & Development Fees
    35,151       35,930  
     Compensation
    166,025       290,818  
     Other General and Administrative Expenses
    114,333       184,036  
        Total Operating Expenses
    699,427       901,395  
                 
     Loss From Operations
    (415,288 )     (615,766 )
                 
Other Income
               
     Realized Gain on Available for Sale  Securities (Note G)
    270,450       -  
     Unrealized Gain on Available for Sale  Securities (Note G)
    459,650       353,600  
     Interest Income
    -       781  
        Total Other Income
    730,100       354,381  
                 
Net Income (Loss)
  $ 314,812     $ (261,385 )
                 
Preferred Stock Dividends
    34,205       384,847  
                 
Income (Loss) Attributable to Common Shareholders
  $ 280,607     $ (646,232 )
                 
Weighted Average Outstanding Shares
               
Basic
    233,773,144       231,299,810  
Diluted
      251,141,406      
231,299,810
 
                 
Income (Loss) Per Share (basic and diluted)
  $ 0.001     $ (0.003 )
 
See accompanying notes to financial statements.
 
 
3
 
 
HEALTH DISCOVERY CORPORATION
 
(unaudited)
 
For the Three Months Ended March 31, 2013 and 2012
 
   
2013
   
2012
 
Cash Flows From Operating Activities
           
Net Income (Loss)
  $ 314,812     $ (261,385 )
Adjustments to Reconcile Net Income (Loss)  to Net Cash
               
Used for Operating Activities:
               
        Stock-based Compensation
    17,931       28,951  
        Services Exchanged for Options
    10,158       -  
        Realized Gain on Investments in Available for  Sale Securities Measured in Accordance with the Fair Value Option (Note G)
    (270,450 )     -  
        Unrealized Gain on Investments in Available for  Sale Securities Measured in Accordance with the Fair Value Option (Note G)
    (459,650 )     (353,600 )
        Increase in Deferred Charges
    -       (252,577 )
        Depreciation and Amortization
    67,832       68,174  
        (Increase) Decrease in Accounts Receivable
    (108 )     397  
        (Decrease) Increase in Deferred Revenue
    (256,247 )     726,092  
        Decrease in Prepaid Expenses and Other Assets
    -       18,750  
        Decrease in Accounts Payable – Trade
    (41,482 )     (134,680 )
        Decrease in Accrued Liabilities
    (50,500 )     (750 )
                Net Cash Used by Operating Activities
    (667,704 )     (160,628 )
                 
Cash Flows From Investing Activities:
               
     Proceeds from Sale of Available for Sale Securities (Note G)
    581,475       -  
 Purchase of Equipment
    -       (3,878 )
                Net Cash (Used for) Provided by Investing Activities
    581,475       (3,878 )
                 
Net Decrease in Cash
    (86,229 )     (164,506 )
                 
Cash, at Beginning of Period
    171,424       890,326  
                 
Cash, at End of Period
  $ 85,195     $ 725,820  
                 
Supplemental Cash Flow Information
Non-cash Transactions:
               
Acquisition Fair Value of Available for Sale Securities Recorded as an Investment and as Deferred Revenue
    -     $ 1,944,800  
 
See accompanying notes to financial statements.
 
 
4
 
 
HEALTH DISCOVERY CORPORATION
 
 
Note A - BASIS OF PRESENTATION
 
Health Discovery Corporation (the “Company”) is a technology-oriented company that has acquired patents and has patent pending applications for certain machine learning tools, primarily pattern recognition techniques using advanced mathematical algorithms to analyze large amounts of data thereby uncovering patterns that might otherwise be undetectable.  Such machine learning tools are currently in use for diagnostics and drug discovery, but are also marketed for other applications.  The Company licenses the use of its patented protected technology and may provide services to develop specific learning tools under development agreements or to sell to third parties.
 
The accounting principles followed by the Company and the methods of applying these principles conform with accounting principles generally accepted in the United States of America (GAAP).  In preparing financial statements in conformity with GAAP, management is required to make estimates and assumptions that affect the reported amounts in the financial statements.  Actual results could differ significantly from those estimates.
 
The interim financial statements included in this report are unaudited but reflect all adjustments which, in the opinion of management, are necessary for a fair presentation of the financial position and results of operations for the interim periods presented.  All such adjustments are of a normal recurring nature.  The results of operations for the three month period ended March 31, 2013 are not necessarily indicative of the results of a full year’s operations and should be read in conjunction with the financial statements and footnotes included in the Company’s annual report on Form 10-K for the year ended December 31, 2012.
 
Recent Accounting Pronouncements
 
  In February 2013, the FASB issued an amendment which requires disclosure of amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present either on the face of the statement of operations or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required to be reclassified to net income in its entirety in the same reporting period. For amounts not reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures that provide additional detail about those amounts. This guidance is effective prospectively for annual and interim periods beginning after December 15, 2012. The Company adopted this guidance in its first quarter of 2013 reporting period which did not have an impact on the financial statements.
 
Note B – REVENUE RECOGNITION
 
Revenue is generated through the sale or license of patented technology and processes and from services provided through development agreements.  These arrangements are generally governed by contracts that dictate responsibilities and payment terms.  The Company recognizes revenues as they are earned over the duration of a license agreement or upon the sale of any owned patent once all contractual obligations have been fulfilled.  If a license agreement has an undetermined or unlimited life, the revenue is recognized over the remaining expected life of the patents. Revenue is recognized under development agreements in the period the services are performed.
 
The Company treats the incremental direct cost of revenue arrangements, which consists principally of employee bonuses, as deferred charges and these incremental direct costs are amortized to expense using the straight-line method over the same term as the related deferred revenue recognition.
 
Deferred revenue represents the unearned portion of payments received in advance for licensing and development agreements.  The Company had total unearned revenue of $1,985,357 as of March 31, 2013.  Unearned revenue of $1,024,988 is recorded as current and $960,369 is classified as long-term.
 
 
5
 
 
HEALTH DISCOVERY CORPORATION
 
Notes to Financial Statements, continued
 
Note C - NET INCOME (LOSS) PER SHARE
 
Basic Earnings Per Share (“EPS”) includes no dilution and is computed by dividing income or loss available to common shareholders by the weighted average number of common shares outstanding for the period.  Diluted EPS reflects the potential dilution of securities that could share in the earnings or losses of the entity.
 
Due to the net loss for the three month period ending March 31, 2012, the calculation of diluted per share amounts would create an anti-dilutive result and therefore are not presented.
 
The following is an analysis of the basic and diluted earnings per common share computations for the three months ended March 31, 2013:
 
   
Three months ended
March 31, 2013
 
Basic:
     
Net income attributable to common shareholders
  $ 280,607  
Basic weighted average common shares outstanding
    233,773,144  
Basic earnings per common share
  $ 0.001  
         
         
Diluted:
       
Net income attributable to common shareholders
  $ 314,812  
Basic weighted average common shares outstanding
    233,773,144  
         
Effect of dilutive securities:
       
Conversion of options and warrants
    28,087  
Conversion of preferred shares to common shares
    17,340,175  
Diluted weighted average common shares outstanding
    251,141,406  
Diluted earnings per common share
  $ 0.001  
 
During the three month period ended March 31, 2013, 5,500,000 outstanding stock options and warrants were not included in the computation of diluted earnings per common share because to do so would have an antidilutive effect.  In addition, for the three month period ended March 31, 2013, 17,340,175 shares of convertible preferred stock were not included in the diluted earnings per common share calculation because to do so would have had an antidilutive effect.
 
Note D - STOCK-BASED COMPENSATION AND OTHER EQUITY BASED PAYMENTS
 
Stock-based expense included in our net income for the three months ended March 31, 2013 consisted of $28,089 for stock options granted to officers and directors.  Stock-based expense included in our net loss for the three months ended March 31, 2012 was $28,951.
 
As of March 31, 2013, there was $148,966 of unrecognized cost related to stock option and warrant grants.  The cost is to be recognized over the remaining vesting periods that average approximately 2 years.  
 
 
6
 
 
HEALTH DISCOVERY CORPORATION
 
Notes to Financial Statements, continued
 
In connection with their appointment to the Board of Directors, on February 28, 2013, the Company granted to Mr. David Eckoff, Mr. Sumio “Sumi” Takeichi and Dr. John Norris each an option to purchase 1,500,000 shares of the Company’s common stock. The options vest 250,000 shares every six months, have an exercise price of $0.032, and expire on February 28, 2023.  The fair value of each option granted is $0.023 and was estimated on the date of grant using the Black-Scholes pricing model with the following assumptions: dividend yield at 0%, risk-free interest rate of 1.97%, an expected life of 5 years, and volatility of 96%.  The aggregate computed value of these options is $105,010, and this amount will be charged as an expense over the three year vesting period.
 
The following schedule summarizes combined stock option and warrant information for the three months ended March 31, 2013 and the twelve months ended December 31, 2012:
 
 
 
2012
 
Option and
 Warrant
Shares
   
Weighted
Average
Exercise Price
 
Outstanding, January 1, 2012
    30,291,667     $ 0.16  
Granted
    1,000,000     $ 0.05  
Exercised
    (473,334 )   $ 0.07  
Forfeited
    (3,000,000 )   $ 0.12  
Expired un-exercised
    (15,568,333 )   $ 0.21  
Outstanding, December 31, 2012
    12,250,000     $ 0.10  
                 
2013
               
Granted
    4,500,000     $ 0.03  
Exercised
    -       -  
Forfeited
    (5,000,000 )   $ 0.08  
Expired un-exercised
    -       -  
Outstanding, March 31, 2013
    11,750,000     $ 0.09  
 
The following schedule summarizes combined stock option and warrant information as of March 31, 2013:
 
Exercise Prices
 
Number
Outstanding
   
Weighted-
Average
Remaining
 Contractual
Life (years)
   
Number
Exercisable
   
Weighted
Average
Remaining
Contractual Life (years) of
Exercisable
Warrants and
Options
 
                         
 $0.03
    4,500,000       9.90       -       -  
$0.05
    1,000,000       4.75       500,000       4.75  
$0.08
    2,750,000       0. 78       2,750,000       0.78  
$0.12
    1,000,000       3.00       1,000,000       3.00  
$0.19
    2,500,000       7.58       2,500,000       7.58  
Total     11,750,000               6,750,000          
 
The weighted average remaining life of all outstanding warrants and options at March 31, 2013 is 7 years.  As of March 31, 2013, the aggregate net intrinsic value of all options and warrants outstanding is $636,237.
 
Note E - PATENTS
 
The Company has acquired and developed a group of patents related to biotechnology and certain machine learning tools used for diagnostic and drug discovery. Legal costs associated with patent acquisitions   and the application processes for new patents are also capitalized as patent assets. The Company has recorded as other assets $1,663,544 in patents and patent related costs, net of $2,322,250 in accumulated amortization, at March 31, 2013.
 
Amortization charged to operations for the three months ended March 31, 2013 and 2012 were $65,680 in both years. Estimated amortization expense for the next five years is $262,720 per year.
 
 
7
 
 
HEALTH DISCOVERY CORPORATION
 
Notes to Financial Statements, continued
 
Note F – STOCKHOLDERS’ EQUITY
 
Series B Preferred Stock
 
The Company sold to individual investors a total of 19,402,675 shares of Series B Preferred Stock for $1,490,015, net of associated expenses, in 2009.  
 
The Series B Preferred Stock may be converted into Common Stock of the Company at the option of the holder, without the payment of additional consideration by the holder, so long as the Company has a sufficient number of authorized shares to allow for the exercise of all of its outstanding warrants and options. The Shares of Series B Preferred Stock must be converted into Common Stock of the Company upon the demand by the Company after the fifth anniversary of the date of issuance.
 
The Series B Preferred Stock  accrues dividends at the rate of 10% of the Series B Original Issue Price per year, which shall be satisfied by the fifth anniversary of the issuance of such shares of the Series B Preferred Stock (the “Original Issue Date”) by the Company’s issuance of the number of shares of Common Stock equal to such accrued dividends divided by the average closing price of the Company’s Common Stock as reported on the Over-the-Counter-Bulletin Board or other exchange on which the Company’s Common Stock trades during the prior ten business days or by the payment of cash, as the Company may determine in its sole discretion. Dividends have been accrued for the Series B Preferred Stock in the amount of $455,546 as of December 31, 2012 and $489,751 as of March 31, 2013.
 
Subject to the limitations set forth in the Amended and Restated Articles of Amendment to Articles of Incorporation and applicable law, as long as the Series B Preferred Stock remain outstanding, the Company is required to pay the holders of the Series B Preferred Stock a special dividend equal to 15% of Company Net Revenue collected beginning with the Original Issue Date and ending on the date the Series B Preferred Stock cease to be outstanding (the “Cash Bonus”).  Company Net Revenue include, but is not limited to, revenue derived from development fees, license fees and royalties paid to the Company and revenue collected as a result of the sale of any asset of the Company or distributions from SVM Capital, LLC (each a “Revenue Contract”), reduced by the amount of any out-of-pocket costs or expenses that are directly related to obtaining, negotiating or documenting the Revenue Contracts and the performance of such Revenue Contracts, but does not include the proceeds of any capital infusions from the exercise of outstanding options or warrants or as a result of any capital raise undertaken by the Company.  At any time following the Original Issue Date, the Company may satisfy the special dividend right in its entirety if the aggregate payments made to the Series B Holders are equal to that value which provides an internal annual rate of return of twenty percent (20%) on the Series B Preferred Stock.  The maximum Cash Bonus to be paid each year shall be the aggregate Series B Original Issue Price, and no amounts in excess of such amount shall accrue or carry-over to subsequent years. No special dividends are accrued for the Series B Preferred Stock special dividend as of March 31, 2013 and December 31, 2012.
 
Note G – INVESTMENT IN AVAILABLE FOR SALE SECURITIES
 
The Company has elected the fair value option in accordance with ASC 825, Financial Instruments, as it relates to the 1,360,000 shares of NeoGenomics common stock that were acquired under the NeoGenomics Master License Agreement executed on January 6, 2012. Management made the election for the fair value option related to this investment because it believes the fair value option for the NeoGenomics common stock provides a better measurement from which to compare financial statements from reporting period to reporting period. No other financial assets or liabilities are fair valued using the fair value option.
 
The Company’s investment in NeoGenomics common stock is recorded on the accompanying balance sheets as of March 31, 2013 under the caption Investment in Available for Sale Securities. The carrying value of this investment on the date of acquisition was approximately $1,945,000. The change in fair value from December 31, 2012 to March 31, 2013 was $730,100 and is classified as other income under the captions Realized and Unrealized Gain on Available for Sale Securities for the three months ended March 31, 2013 in the accompanying statements of operations. The Company classifies its investment as an available for sale security presented as a trading security on the balance sheet and the fair value is considered a Level 1 investment in the fair value hierarchy. The March 31, 2013 fair value of the investment of $1,864,785 is based on the closing stock price of the NeoGenomics common stock at the end of the reporting period.
 
 
8
 
 
HEALTH DISCOVERY CORPORATION
 
Notes to Financial Statements, continued
 
Note H – SUBSEQUENT EVENTS
 
On May, 10, 2013, Secretary Norman Mineta agreed to join the Company’s Board of Directors. Norman Mineta, vice chair of public policy at Hill+Knowlton Strategies, former U.S. Secretary of Transportation and former Secretary of Commerce, provides counsel and strategic advice to clients on a wide range of business and political issues. Secretary Mineta is well known for his work in the areas of transportation—including aviation, surface transportation and infrastructure—and national security. He is recognized for his accomplishments in economic development, science and technology policy, foreign and domestic trade, budgetary issues and civil rights.
 
In connection with his appointment to the Board of Directors, the Company will grant to Secretary Mineta an option to purchase 1,500,000 shares of the Company’s common stock. The options vest 250,000 shares every six months, have an exercise price of $0.048, and expire on May 10, 2023.  The fair value of each option granted is $0.035 and was estimated on the date of grant using the Black-Scholes pricing model with the following assumptions: dividend yield at 0%, risk-free interest rate of 1.91%, an expected life of 5 years, and volatility of 97%.  The value of these options is $53,017, and this amount will be charged as an expense over the three year vesting period.
 
Note I – COMMITMENTS
 
From time to time, the Company is subject to various claims primarily arising in the normal course of business. Although the outcome of these matters cannot be determined, the Company does not believe it is probable that any such claims will result in material costs and expenses.
 
 
9
 
 
HEALTH DISCOVERY CORPORATION
 
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
Corporate Overview
 
Our Company is a pattern recognition company that uses advanced mathematical techniques to analyze large amounts of data to uncover patterns that might otherwise be undetectable.  The Company operates primarily in the field of molecular diagnostics where such tools are critical to scientific discovery.  The terms artificial   intelligence and machine learning are sometimes used to describe pattern recognition tools.
 
HDC’s mission is to use its patents, intellectual prowess, and clinical partnerships principally to identify patterns that can advance the science of medicine, as well as to advance the effective use of our technology in other diverse business disciplines, including the high-tech, financial, and healthcare technology markets.
 
Our historical foundation lies in the molecular diagnostics field where we have made a number of discoveries that play a critical role in developing more personalized approaches to the diagnosis and treatment of certain diseases.  However, our SVM assets in particular have broad applicability in many other fields.  Intelligently applied, HDC’s pattern recognition technology can be a portal between enormous amounts of otherwise undecipherable data and truly meaningful discovery.
 
Our Company’s principal asset is its intellectual property which includes advanced mathematical algorithms called Support Vector Machines (SVM) and Fractal Genomic Modeling (FGM), as well as biomarkers that we discovered by applying our SVM and FGM techniques to complex genetic and proteomic data.  Biomarkers are biological indicators or genetic expression signatures of certain disease states.  Our intellectual property is protected by more than 90 patents that have been issued or are currently pending around the world.
 
Our business model has evolved over time to respond to business trends that intersect with our technological expertise and our capacity to professionally manage these opportunities.  We initially sought only to use our SVMs internally in order to discover and license our biomarker signatures to various diagnostic and pharmaceutical companies.  Today, our commercialization efforts include: utilization of our discoveries and knowledge to help develop diagnostic and prognostic predictive tests; licensure of the SVM and FGM technologies directly to diagnostic companies; and, the formation of new ventures with domain experts in other fields where our pattern recognition technology holds commercial promise.
 
Operational Activities
 
The Company markets its technology and related developmental expertise to prospects in the healthcare, biotech, and life sciences industries.  Given the scope of some of these prospects, the sales cycle can be quite long, but management believes that these marketing efforts may produce favorable results in the future.  
 
NeoGenomics License
 
On January 6, 2012, we entered into a Master License Agreement (the “NeoGenomics License”) with NeoGenomics Laboratories, Inc. (“NeoGenomics Laboratories”), a wholly-owned subsidiary of NeoGenomics, Inc. (“NeoGenomics”).  Pursuant to the terms of the NeoGenomics License, we granted to NeoGenomics Laboratories and its affiliates an exclusive worldwide license to certain of our patents and know-how to use, develop and sell products in the fields of laboratory testing, molecular diagnostics, clinical pathology, anatomic pathology and digital image analysis (excluding non-pathology-related radiologic and photographic image analysis) relating to the development, marketing production or sale of any “Laboratory Developed Tests” or LDTs or other products used for diagnosing, ruling out, predicting a response to treatment, and/or monitoring treatment of any or all hematopoietic and solid tumor cancers excluding cancers affecting the retina and breast cancer. We retain all rights to in-vitro diagnostic (IVD) test kit development.
 
Upon execution of the NeoGenomics License, NeoGenomics Laboratories paid us $1,000,000 in cash and NeoGenomics issued to us 1,360,000 shares of NeoGenomic’s common stock, par value $0.001 per share, which had a market value of $1,945,000 using the closing price of $1.43 per share for NeoGenomic’s common stock on the OTC Bulletin Board on January 6, 2012.  In addition, the NeoGenomics License provides for milestone payments in cash or stock, based on sublicensing revenue and revenue generated from products and services developed as a result of the NeoGenomics License.  Milestone payments would be in increments of $500,000 for every $2,000,000 in GAAP revenue recognized by NeoGenomics Laboratories up to a total of $5,000,000 in potential milestone payments. After $20,000,000 in cumulative GAAP revenue has been recognized by NeoGenomics Laboratories, we will receive a royalty of (i) 6.5% (subject to adjustment under certain circumstances) on net revenue generated from all Licensed Uses except for the Cytogenetics Interpretation System and the Flow Cytometry Interpretation System and (ii) a royalty of 50% of net revenue (after the recoupment of certain development and commercialization costs) that NeoGenomics Laboratories derives from any sublicensing arrangements it may put in place for the Cytogenetics Interpretation System and the Flow Cytometry Interpretation System.
 
 
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HEALTH DISCOVERY CORPORATION
 
Management’s Discussion and Analysis, continued
 
NeoGenomics Laboratories agreed to use it best efforts to commercialize certain products within one year of the date of the license, subject to two one-year extensions per product if needed, including a “Plasma Prostate Cancer Test”, a “Pancreatic Cancer Test”, a “Colon Cancer Test”, a “Cytogenetics Interpretation System”, and a “Flow Cytometry Interpretation System.” In January 2013, NeoGenomics informed the Company of its intent to continue under the terms of the license and therefore extend the license for the first of its one-year extensions.
 
If NeoGenomics Laboratories has not generated $5.0 million of net revenue from products, services and sublicensing arrangements within five years, we may, at our option, revoke the exclusivity with respect to any one or more of the initial licensed products, subject to certain conditions.
 
The Company believes our relationship with NeoGenomics is instrumental in our medical and diagnostic testing development.  We further believe the majority, if not all, of our applications in the medical field will be done in conjunction with the NeoGenomics License.
 
Plasma Test for Prostate Cancer
 
NeoGenomics has initiated the development of the Blood Test for Prostate Cancer under the direction of Dr. Maher Albitar using the genes patented by HDC.
 
Cytogenetic Analysis
 
Cytogenetic analysis is the science of studying chromosomes.  Microscopic evaluation of individual chromosomes remains the first step in the evaluation of the human genome.  Cytogenetic analysis is performed on almost all patients with hematopoietic diseases (blood cancers such as leukemia and lymphoma) and on a significant number of patients with solid tumors. The collected data is useful for diagnosis, prognosis and monitoring of diseases.  Currently most of the analysis is performed manually by specially trained technicians.  The work is labor-intensive and subjective. Computer automation of this work could significantly reduce cost and improve the quality of the test.
 
NeoGenomics is currently working on development, validation and commercialization of this new image analysis tool for cytogenetic analysis under the direction of Dr. Maher Albitar.
 
Flow Cytometry
 
Management believes that our efforts to develop an SVM-based diagnostic test to help interpret flow cell cytometry data for myelodysplastic syndrome (pre-leukemia) has resulted in a successful proof of concept. The Company, along with NeoGenomics, is now capable of completing development, final validation and commercialization of the new diagnostic test for the interpretation of flow cytometry data. This test has been licensed to NeoGenomics for final development.
 
SVM Capital, LLC
 
In January 2007, SVM Capital, LLC (“SVM Capital”) was formed as a joint venture between HDC and Atlantic Alpha Strategies, LLC (“Atlantic Alpha”) to explore and exploit the potential applicability of our SVM technology to quantitative investment management techniques.  Atlantic Alpha’s management has over thirty years of experience in commodity and futures trading.   Atlantic Alpha reports that the SVM technology is now working well in two distinct investment areas.
 
 
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HEALTH DISCOVERY CORPORATION
 
Management’s Discussion and Analysis, continued
 
First, it is being applied to price data.  Utilizing open, high, close, low and volume SVM utilizes an 85 dimensional space to make future predictions.  This price driven model is using fifty exchange traded funds (ETFs) which give it a global perspective.  Much testing and refinement of this model has been accomplished and is being used for trading by Atlantic Alpha.
 
Second, Atlantic Alpha is applying SVM technology to quarterly fundamental corporate data such as sales, earning and projected earnings.  SVM is utilized to separate stocks which should outperform and underperform in the next quarter based on current data.  The Company is actively marketing the SVM Capital product to potential institutional users of the technology.
 
Retinalyze
 
On February 17, 2012, the Company announced the commercial launch of Retinalytics SVM TM , to assist Ophthalmologists and Optometrists in the Detection of Macular Degeneration. While the first Retinalytics SVM TM product released focuses on age-related macular degeneration, the Company continues to develop a second Retinalytics SVM TM product using fundoscopic images of retinal vessels to assist eye care professionals in the detection of Alzheimer’s disease.
 
The volume of images processed thus far been significantly less than expected and revenues to date from Retinalyze have been negligible. Retinalyze, LLC continues to evaluate options to improve the product with the goal of solving this slower than expected adoption issue, thereby allowing the analysis of a higher volume of scans. In addition, the Company is evaluating all options related to the product with the goal of optimal commercialization of this technology.
 
Intellectual Property Developments
 
Currently, the Company holds the exclusive rights to 57 issued U.S. and foreign patents covering uses of SVM and FGM technology for discovery of knowledge from large data sets.  The Company also has 23 pending U.S. and foreign patent applications covering uses of the SVM technology as well as biomarkers and diagnostic methods that have been discovered using the SVM technology.  The reduction in the total number of issued and pending patents during the past year resulted from the Company’s decision to allow certain foreign patents issued and/or filed in countries that were deemed to have lower strategic value to lapse.  This in turn reduced the Company’s total expenses for patent maintenance.
 
Intel
 
In October 2012, the US Patent and Trademark Office (“USPTO”) issued a reexamination certificate for Intel’s U.S. Patent No. 7,685,077, which issued in 2010 with claims covering SVM-RFE.  The reexamination certificate confirms the patentability of the claims as amended during the reexamination proceedings.
 
While disappointed with issuance of the reexamination certificate, the Company draws encouragement from the fact that the USPTO has agreed that all elements of the Company’s patented SVM-RFE method are present in the Intel claims. A fundamental principle of patent law is that the addition of one or more elements to a patented claim does not avoid infringement.  In this case, Intel merely added a standard computer operation to the Company’s SVM-RFE method.  Furthermore, possession of a patent on series of steps does not avoid infringement of a patent covering a subset of those steps.
 
The Company submitted a request to the USPTO to initiate interference proceedings once the reexamination certificate was issued and has subsequently received a final rejection in the application that was filed to provoke the interference.  The reasoning behind the rejection has been uniformly criticized in decisions by both the Patent Office Board of Appeals and the Federal Appeals Court in cases with nearly identical facts.  A response referring to these decisions has been submitted to the USPTO, and reversal of the rejection is expected, although the USPTO has yet to act on this response.
 
 
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HEALTH DISCOVERY CORPORATION
 
Management’s Discussion and Analysis, continued
 
Three Months Ended March 31, 2013 Compared with Three Months Ended March 31, 2012
 
Revenue
 
For the three months ended March 31, 2013, revenue was $284,139 compared with $285,629 for the three months ended March 31, 2012.  The revenue earned during the first quarter of 2013 and 2012 is primarily related to the licensing revenue recognition for the NeoGenomics License.
 
Operating and Other Expenses
 
Amortization expense was $65,680 for both the three months ended March 31, 2013 and 2012. Amortization expense relates primarily to the costs associated with filing patent applications and acquiring rights to the patents.
 
Professional and consulting fees totaled $279,083 for the three months ended March 31, 2013, compared with $293,758 for the same 2012 period.  The relatively flat decrease is due primarily to lower costs associated with professional service fees of accounting services and patent filing fees.
 
Legal fees remained relatively flat with fees totaling totaled $39,155 during the three months ended March 31, 2013 and $31,173 during the same period in 2012.
 
Research and development expense was $35,151 for the three months ended March 31, 2013, and $35,930 for the same period in 2012. This expense for research and development relates primarily to work completed under the NeoGenomics License.
 
Compensation expense of $166,025 for the three months ended March 31, 2013 was lower than the $290,818 reported for the comparable 2012 period. The decrease is attributed to a reduction in full time employees.
 
Other general and administrative expense decreased to $114,333 for the three months ended March 31, 2013, compared to $184,036, for the same period in 2012.  This decrease was due to the elimination of expenses paid in connection with the NeoGenomics transaction, the elimination of investor relations charges, and by reduced travel expenses.
 
Loss from Operations
 
The loss from operations for the three months ended March 31, 2013 was $4 15,288, compared to $ 615,766 for the three months ended March 31, 2012. This reduction was due to lower costs primarily associated with compensation and other general and administrative expenses.
 
Other Income and Expense
 
The Company received a portion of the NeoGenomics license fee in NeoGenomics stock.  The Company has chosen to measure the gain or loss on the value of this asset using the fair value option method.  During the three month period ending March 31, 2013, the change in the NeoGenomics stock fair value increased by $730,100, which is recorded as other income in the statements of operations.  During the same three month period in 2012, the change in the NeoGenomics stock fair value increased by $353,600.
 
There was no interest income for the three months ended March 31, 2013, compared to $781 in 2012.  Interest income decreased because the Company had less cash on hand to invest throughout the 2013 period.
 
 
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HEALTH DISCOVERY CORPORATION
 
Management’s Discussion and Analysis, continued
 
Net Income / Loss
 
The net income for the three months ended March 31, 2013 was $314,812, compared to a loss of $261,385 for the three months ended March 31, 2012.  The net income was due primarily to the gain on the sale of NeoGenomics stock.
 
The earnings attributable to common shareholders was $280,607 for the three months ended March 31, 2013 compared to a loss of $646,232 in the three months ended March 31, 2012. This significant change is related to the accrual of the special dividend due to the Series B Holders as a result of the NeoGenomics transaction which occurred in the three month period ended March 31, 2012.
 
Earnings per share were $0.001 for the three month period ended March 31, 2013 compared to loss per share of $0.003 for the quarterly period ended March 31, 2012.
 
Liquidity and Capital Resources
 
Our ability to continue as a going concern is dependent upon our licensing arrangements with third parties, achieving profitable operations, obtaining additional financing and successfully bringing our technologies to the market.  The outcome of these matters cannot be predicted at this time.  Our financial statements have been prepared on a going concern basis and do not include any adjustments to the amounts and classifications of the assets and liabilities that might be necessary should we be unable to continue in business.
 
If the going concern assumption was not appropriate for our financial statements then adjustments would be necessary in the carrying value of assets and liabilities, the reported expenses and the balance sheet classifications used.  Such adjustments may be material. 
 
At March 31, 2013, the Company had $85,195 in cash and cash equivalents and total current liabilities of $1,128,296.  The primary amount of current liabilities relates to $1,024,988 in deferred revenue. Additionally, we continue to sell our NeoGenomics Stock in order to fund operations. Although the NeoGenomics Stock has increased in value, the number of shares and amount of cash we can generate from the sale of NeoGenomics Stock is subject to fluctuating market and price conditions. As a result we do not believe we have sufficient resources to meet all of our current obligations unless the Company is able to secure revenue via licensing activity or other forms of fund raising either in the debt or equity markets.  None of these options are definitive and there can be no assurances the Company will be successful in these financing efforts.
 
The Company has taken steps to reduce the Company’s expenditures in order to reduce the “burn rate” to approximately $185,000 per month. These steps included reducing expenses and allocating our remaining cash reserves for our operational requirements at a reduced level.
 
The Company has relied primarily on equity and debt financing for liquidity.  The Company must increase revenues in order to generate sufficient cash to continue operations.  The Company’s plan to have sufficient cash to support operations is comprised of selling its NeoGenomics Stock, generating revenue through licensing its significant patent portfolio, providing services related to those patents, and obtaining additional equity or debt financing.  The Company has been unable to generate significant revenue, as further described above.  As a result, the Company has implemented a cash conservation program.
 
The following table summarizes our contr actual obligations.
 
   
Total
   
1 Year
Or Less
   
More Than
 1 Year
 
Office Lease
  $ 14,800     $ 14,800     $ -  
Total
  $ 14,800     $ 14,800     $ -  
 
 
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HEALTH DISCOVERY CORPORATION
 
Management’s Discussion and Analysis, continued
 
Off-Balance Sheet Arrangements
 
The Company has no off-balance sheet arrangements that provide financing, liquidity, market or credit risk support or involve leasing, hedging or research and development services for our business or other similar arrangements that may expose us to liability that is not expressly reflected in the financial statements.
 
Forward-Looking Statements
 
This Report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 12E of the Securities Exchange Act of 1934, including or related to our future results, certain projections and business trends. Assumptions relating to forward-looking statements involve judgments with respect to, among other things, future economic, competitive and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond our control. When used in this Report, the words “estimate,” “project,” “intend,” “believe,” “expect” and similar expressions are intended to identify forward-looking statements. Although we believe that assumptions underlying the forward-looking statements are reasonable, any of the assumptions could prove inaccurate, and we may not realize the results contemplated by the forward-looking statement. Management decisions are subjective in many respects and susceptible to interpretations and periodic revisions based on actual experience and business developments, the impact of which may cause us to alter our business strategy or capital expenditure plans that may, in turn, affect our results of operations. In light of the significant uncertainties inherent in the forward-looking information included in this Report, you should not regard the inclusion of such information as our representation that we will achieve any strategy, objective or other plans. The forward-looking statements contained in this Report speak only as of the date of this Report as stated on the front cover, and we have no obligation to update publicly or revise any of these forward-looking statements. These and other statements which are not historical facts are based largely on management’s current expectations and assumptions and are subject to a number of risks and uncertainties that could cause actual results to differ materially from those contemplated by such forward-looking statements. These risks and uncertainties include, among others, the failure to successfully develop a profitable business, delays in identifying customers, and the inability to retain a significant number of customers, as well as the risks and uncertainties described in “Risk Factors” section to our Annual Report for the fiscal year ended December 31, 2012.
 
Item 3. Quantitative and Qualitative Disclosures about Market Risk
                      
 
Not Applicable.
 
Item 4. Controls and Procedures
 
As of the end of the period covered by this report (the “Evaluation Date”), we carried out an evaluation regarding the fiscal quarter ended March 31, 2013, under the supervision and with the participation of our management, including our Chief Executive Officer, who is also serving as our Principal Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”).  Based upon this evaluation, our management concluded that, as of the Evaluation Date, our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in the reports that are filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified by the Securities and Exchange Commission’s rules and forms and that our disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management including our Chief Executive Officer, as appropriate, to allow timely decisions regarding required disclosure.
 
Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that the Company’s disclosure controls and procedures will detect or uncover every situation involving the failure of persons within the Company to disclose material information otherwise required to be set forth in the Company’s periodic reports.  
 
 
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HEALTH DISCOVERY CORPORATION
 
The Company’s management is also responsible for establishing and maintaining adequate internal control over financial reporting to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.  As of the Evaluation Date, no changes in the Company’s internal control over financial reporting occurred that have materially affected or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
 
Our Annual Report on Form 10-K contains information regarding a material weakness in our internal control over financial reporting as of December 31, 2012 due to an inadequate segregation of duties resulting from our small number of employees.
 
 
Item 1. Legal Proceedings
 
None.
 
Item 1A. Risk Factors
  
In addition to the other information set forth in this report, you should carefully consider the risk factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2012, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.
 
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
                      
None.
 
Item 3. Defaults upon Senior Securities
 
Not applicable.
 
Item 4. Mine Safety Disclosures
 
Not applicable.
 
Item 5. Other Information
 
None.
 
Item 6. Exhibits
 
The following exhibits are attached hereto or incorporated by reference herein (numbered to correspond to Item 601(a) of Regulation S-K, as promulgated by the Securities and Exchange Commission) and are filed as part of this Form 10-Q:
 
3.1
Articles of Incorporation. Registrant incorporates by reference Exhibit 3.1 to Form 8-K filed July 18, 2007.
 
3.1(a)
Articles of Amendment to Articles of Incorporation.  Registrant incorporates by reference Exhibit 99.1 to Form 8-K filed October 10, 2007.
 
 
3.1(b)
Articles of Amendment to Articles of Incorporation.  Registrant incorporates by reference Exhibit 3.1(b) to Form 10-K filed March 31, 2009.
 
 
3.1(c)
Amended and Restated Articles of Amendment to Articles of Incorporation.  Registrant incorporates by reference Exhibit 3.1 to Form 10-Q filed November 16, 2009.
 
 
 
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HEALTH DISCOVERY CORPORATION
 
3.2
By-Laws. Registrant incorporates by reference Exhibit 3.2 to Form 8-K filed July 18, 2007.
 
 
4.1
Copy of Specimen Certificate for shares of Common Stock. Registrant incorporates by reference Exhibit 4.1 to Registration Statement on Form SB-2, filed June 4, 2001.
 
 
4.1(a)
Copy of Specimen Certificate for shares of Common Stock. Registrant incorporates by reference Exhibit 4.1 (b) to Form 10-KSB, filed March 30, 2004.
 
 
4.1(b)
Copy of Specimen Certificate for shares of Series A Preferred Stock.  Registrant incorporates by reference Exhibit 4.1(b) to Form 10-K filed March 31, 2008.
 
 
4.1(c)
Copy of Specimen Certificate for shares of Series B Preferred Stock.  Registrant incorporates by reference Exhibit 4.1(c) to Form 10-K filed March 31, 2009.
 
10.27
License Agreement, dated January 6, 2012, between Health Discovery Corporation and NeoGenomics Laboratories, Inc. Registrant incorporates by reference Exhibit 10.27 to Form 8-K filed on January 12, 2012.
 
10.28
Form of Option Award for Directors, David Eckoff, Norman Mineta, John Norris and Sumio Takeichi.  Filed herewith. *
 
31.1
Rule 13a-14(a)/15(d)-14(a) Certifications of Chief Executive Officer and Principal Financial Offier. Filed herewith.
 
32.1
Section 1350 Certifications of Chief Executive Officer and Principal Financial Officer. Filed herewith.
 
* Management contract or compensatory plan or arrangement
 
 
17
 
 
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
Health Discovery Corporation
 
  Registrant  
       
Date: May 15, 2013
By:
/s/ John A. Norris, J.D., M.B.A.  
  Printed Name: John A. Norris, J.D., M.B.A.
 
Title: Chief Executive Officer, Principal Financial Officer, and
Principle Accounting Officer
       
 
 
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